4. Background, recitals, or preamble

The section in a modern contract headed "Background" (also known as the recitals or preamble, and often in the past introduced by the heading "Whereas") consists of statements of fact which appear before the operative provisions. It is not mandatory to have a background section, but it can be useful.

In complex commercial contracts, the background section may be used to:

• Recite previous transactions and events leading up to the agreement.

• Set out the reasons for the parties entering into the contract. For example, in a distribution agreement the background may be useful to indicate that the agreement is intended to fall within an EU block exemption.

However, a background section is not essential and in some cases can introduce ambiguity into the agreement where it is inconsistent with the operative part.

Quite often a history of the events leading up to the agreement culminates in a recital that the parties "have agreed" to enter into the agreement in question. This could be confusing if the written agreement replaces a previous agreement, either written or oral. The correct formula is that the parties "are willing" to enter into the agreement, but the question which should then be asked is whether or not this statement is really necessary, since of course it will be obvious that the parties are indeed so willing. On the other hand, such wording can provide a convenient way of ending a description of the events leading up to signature, and can also provide a convenient one sentence summary of the operative part of the agreement, so the reader is immediately aware of the broad nature of its provisions.

The recitals themselves should never contain operative provisions.

5. Operative provisions

Every part of a contract is operative in the sense that it will have legal effect and relevance in one way or another. However, those parts of the contract introduced by the words: "Now it is hereby agreed" (or similar) are often referred to as "the operative provisions (or parts) of the contract". The key operative clauses of a commercial contract can be divided for convenience into two types:

• "Performance obligations".

• "Payment obligations".

Of course, payment also involves performance, so these labels are rather arbitrary, the aim being to contrast the "who does what" obligations in a contract (for example, supplying goods and/or services) with the "who pays what" obligations.

Sometimes the clauses in a contract are referred to as "the main body of the contract". However, it is common for important operative provisions governing the rights and obligations of the parties to be included in schedules rather than in the main body of the contract.

6. Preliminary clauses

Interpretation

The purpose of the interpretation clause is to clarify the parties' intentions by helping to interpret the written terms of the contract. It usually contains definitions used in the contract and specifies how certain terms and expressions should be construed. The interpretation clause may also deal with post-contractual events, for example, amendment or re-enactment of legislation or references to parties including their successors and assigns.

Conditions precedent

Conditions precedent are usually found close to the start of the operative part of the agreement. They provide that the agreement or certain parts of the agreement will only come into force if and when certain conditions are met. Examples of conditions precedent include specified consents or clearances being obtained either from a third party source (for example, local authority planning permission, competition clearance from the CMA, or the grant of government export licences) or through the internal procedures of one of the parties.

Consideration

It is useful to record in writing the consideration that is being provided by the parties, if this is not obvious (which it usually will be, if the reciprocal obligations of the parties are clearly set out in the agreement).

Lack of consideration is not usually a problem in commercial agreements because few commercial parties are likely to do something for nothing in return. However, issues to do with lack of consideration can arise in commercial situations:

• If the parties agree that one party will do something which that party is already contractually obliged to do, so that any new obligation assumed by the other party is unsupported by fresh consideration, there will be no consideration, and therefore no binding agreement.

• Consideration may also become an issue if the parties seek to vary the contract. A variation requires fresh consideration from each party.

A defect in consideration cannot be cured by reference to consideration which does not exist. If it seems likely that there might be an issue of lack of consideration, the practical solution is to do one of the following:

• Acknowledge in the written agreement the existence of some token consideration, for example, the payment of one pound.

• Execute the agreement as a deed.